DETERMINATION OF PREDATORY PRICING: A NEED FOR RETHINKING
Pranav R & Madhumitha S, B.Com; LL.B.(Hons.)
SASTRA Deemed To Be University
Mail: pranavravindher23@gmail.com, mail2smadhumitha@gmail.com
ABSTRACT:
“Predatory pricing is taken to be a manifestation or sign of market dominance. But too often it is a precursor.”
Competition is one of the key elements to be preserved for a well-balanced economy. In India, the Competition Act, 2002 has been enacted to penalize all such practices which obstruct competition. Predatory pricing is one of the recognised forms of abuse of dominant position in the Competition Act. This paper deals in detail about determination of dominance and gives a brief overview about the concept and elements of Predatory Pricing. An attempt is also made to create a link between Predatory and Penetrative Pricing using the Reliance Jio case as an example. This paper has identified the loopholes in the law which are being used by companies which actively engage in predatory pricing, in their favour. Competition Act should be designed in such a way that it penalizes for the activity which affects the competition and not categorize it on the basis of type of enterprise.
INTRODUCTION:
The Competition Law in India has been drafted in such a way so as to safeguard the interests of the stakeholders in the market and to sustain and promote healthy competition between competitors. The Competition Act, 2002 replaced the Monopolies and Restrictive Trade Practices Act, 1969. This change was necessary so as suit newer conditions and practices. The Act established a commission to oversee the practices undertaken by enterprises and prevent those practices which create an adverse effect on the competition. One of such practices is Predatory Pricing strategy. In common understanding, Predatory Pricing refers to pricing of product(s) and service(s) below the cost of production in order to eliminate competitors and to achieve monopoly in the long run. The Act under the Explanation to Section 4 states that Predatory Price means the sale of goods or provision of services, at a price which is below the cost, as may be determined by regulations, of production of the goods or provision of services, with a view to reduce competition or eliminate competitors (Section 4, Competition Act, 2002). As per Section 4 of the Act, no enterprise which is in a dominant position shall abuse its position. In relation to Predatory Pricing, it states that the act will amount to abuse when in dominant position, an enterprise directly or indirectly, imposes unfair or discriminatory price in purchase or sale (including predatory price) of goods or service (Section 4, Competition Act, 2002). From a plain reading of the section, it can be observed that for the Predatory Pricing to be proved, two elements have to be analysed - firstly, whether the enterprise in question holds the dominant position or not and secondly, whether there was any abuse of dominant position. These two elements are discussed in the following sections.
DOMINANT ENTERPRISE:
Under the present scheme of the Competition Act, identification of Predatory Pricing is mainly dependent on the use or misuse of dominant position of the enterprise accused of it. Therefore, it becomes necessary to determine whether or not the said enterprise holds dominant position. The expression ‘dominant position’ has been defined in the Section 4 of the Act as a position of strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to (i) operate independently of competitive forces prevailing in the relevant market; or (ii) affect its competitors or consumers or the relevant market in its favour. Section 19(4) lists out 13 factors which are to be considered while inquiring on the dominant position. Ten of these factors are economic factors like the market share, size and resources of the enterprise, size and importance of the competitors, market structure and size of the market etc., while other factors consider the “social obligations and social costs” and “relative advantage by way of the contribution to the economic development by the enterprise enjoying dominant position having or likely to have an appreciable adverse effect on the competition” and any other factor which may be considered (Section 19, Competition Act, 2002).
The Commission in the case Mr. Ramakant Kini v. Dr. L H Hiranandani Hospital, Mumbai (Case no. 39/ 2012 C.C.I.) clarified that the market share of an entity is ‘only one of the factors that decides whether an enterprise is dominant or not, but that factor alone cannot be decisive proof of dominance’. Similarly in the MCX Stock Exchange Ltd. vs. National Stock Exchange of India Ltd. case (Case No. 13/2009 C.C.I.), the CCI and COMPAT have held that a dominant enterprise need not be a leading player in terms of market share if other factors, such as size, resources, vertical integration indicate dominance.
The Act does not contain any principle regarding the presumption of dominance. But, the CCI have considered internationally recognized principle in this respect. For instance, in the Schott Glass India Pvt. Ltd v Competition Commission of India case (Appeal No. 91/2012 C.A.T), the CCI applied the Akzo presumption of dominance, where dominance is presumed when an enterprise enjoys 50 per cent market share or more. However, in Meru Travel Solution Pvt. Ltd. v. M/s ANI Technologies Pvt. Ltd. & Anr. case (Case No. 25/2017 C.C.I) and the Fast Track Call Cab Pvt. Ltd. & Anr. v. ANI Technologies Pvt. Ltd. Case (Case No. 6 & 74 of 2015), the CCI held that presumption of dominance of an enterprise with more than 50 per cent share may not be accepted, as there is no numerical threshold to presume dominance under the Act. The findings of Raghavan Committee Report were also on the same lines. However, in the Telecommunication sector, when a service provider holds a share of 30 per cent of total activity, then that enterprise is deemed to be “Significant Market Power” (dominant enterprise). According to the Telecommunication Tariff (63rd Amendment) Order, the total activity is to be determined on the basis of either subscriber base or gross revenue.
The Act also does not recognize the concept of collective dominance by enterprises. In Royal Energy v. IOCL, BPCL and HPCL (Case No. 1/28 (C-97/2009/D.G.I.R.)), in determining whether the actions of three oil marketing companies led to an infringement of the Act, the CCI held that collective dominance is not envisaged in the Act under Section 4. This position was reiterated in the Meru Travel Solution Pvt. Ltd. v. M/s ANI Technologies Pvt. Ltd. & Anr. case (Case No. 25/2017 C.C.I) and the Fast Track Call Cab Pvt. Ltd. & Anr. v. ANI Technologies Pvt. Ltd. case (Case No. 6 & 74 of 2015).
These are the factors and precedents which have to be kept in mind while determining whether an enterprise is dominant or not. And because of the scheme of this provision, dominance had to be analysed and determined before one could go about analysing the abuse of such position. If an enterprise is not dominant, then the CCI will not analyse if at all there is any abuse or not.
PREDATORY PRICING:
Predatory pricing is nothing but offering the goods below the cost of production to eliminate competition in the long run by incurring losses in the short run. Many economists comment that it would be unnecessary to penalise predatory pricing as it is self-deterring in nature. A firm which adopts the strategy of predatory pricing inflicts on itself losses, as in case of not gaining market power it becomes the victim to its own trap. On seeing this, other companies may not resort to this pricing policy. Yet the Competition Act, 2002 recognizes a possibility of a firm which could probably gain market and hamper competition and thus penalizes predatory pricing under Section 4(2)(a)(ii). In the case of M/s. Transparent Energy Systems Pvt. Ltd. v. TECPRO Systems Ltd. ((2013) Comp. L.R. 681 (C.C.I.)) the Commission held the following three conditions for identification of predation:
1. The prices of the goods or services of the dominant firm are below the cost of production of such goods or acquisition of such service.
2. Such decline in the prices of the dominant firm was brought with the intention of driving the competitors out of the market.
3. There is a significant planning in order to recover or recoup the losses that are incurred by increasing the prices again after the competitors are forced out of the market.
The appropriate cost tests to determine predatory pricing
The traditional cost tests, which are adopted to determine predatory pricing, are the ATC and AVC tests. AVC is the most appropriate cost measure to determine the issue of predatory pricing. (https://main.trai.gov.in/sites/default/files/TTO_Amendment_Eng_16022018.pdf) The ECJ in the case of AKZO Chemie BV v Commission ([1991] E.C.R. I-3359) set out a two-tiered test for predatory pricing:
• prices below the Average Variable Cost by a dominant firm will be presumed abusive; and
• prices below the average total cost but above the Average Variable Cost will be regarded as abusive if they aim to eliminate competitors.
In the landmark case of Tetra Pak International SA v. Commission of the European communities (1996 E.C.R. I-5951) it was held that prices below average variable cost must always be considered abusive. In such a case, there is no conceivable economic purpose other than the elimination of a competitor, since each item produced and sold entails loss for the undertaking. In India, in determining predatory pricing, AVC was upheld as a perfect substitute or a proxy to marginal cost approach. In the case of Fast Track Cab Pvt. Ltd v. ANI technologies, (Case No. 6 & 74/ 2015) it was held by the court that pricing below the average variable cost in the relevant market was in violation of section 4 of the Act. In H.L.S. Asia Limited, New Delhi v. Schlumberger Asia Services Ltd. Gurgaon and Oil & Natural Gas Corp. Limited, New Delhi, (Case No. 80/2012, 2013) CCI observed that determination of AVC was an important factor to be considered before claiming relief for predatory pricing. Every price below cost price doesn’t make it predatory in nature. The charge of predatory pricing gets attracted only if such pricing has affected the competition and if that pricing could actually upset the functioning of the market.
Intention to eliminate is a key essential element to determine predatory pricing
In the case of Re Modern food industries (3 Comp.LJ. 154 (1996)) it was held that a mere offer of a price lower than the cost of production could not lead automatically to an indictment of predatory pricing, intention to eliminate competition is the main requisite to establish predatory pricing. A dominant enterprise will be judged guilty of predatory pricing if it is found to be charging its customers below cost price. The phrase “with a view to” implies the exclusionary intent which has to be demonstrated (Fast track cab Pvt Ltd v. ANI technologies, Case No. 6 & 74/2015.). It is pertinent to note that in the case of DG v. Seraikella Glass Works (33 C.L.A 225) it was held that a charge of predatory pricing should establish the mala-fide intention on the part of the charged party to drive its competitor out of the business or to eliminate competition. When the evidence and the facts on record shows that the competitor’s business was closed down soon after the drastic reduction in prices, and the respondent hiked up the prices after the ouster of its competitors, the allegation of predatory pricing is proved. Actual foreclosure of competition is not required in all cases to allege predatory pricing. It is sufficient to hold predatory pricing, if there is any possibility of the competition being affected for the purpose of section 4(2). (R v. Hoffmann-La Roche, 1970 E.U.E.C.J. C-85/76) It is interesting to note that sometimes offering below the price by a dominant firm can itself showcase the mala-fide intention to eliminate competition because no enterprise would have the intention to engage in a profit- less venture for eternity (MCX Stock Exchange v. National Stock Exchange Of India, Case No. 13/2009 C.C.I).
Recoupment of losses is essential to assess predatory pricing
For predation to be rational or successful, the firm should have reasonable expectation of recovering the current predatory losses as return for an investment in the form suffering short term loss. Recoupment is nothing but after phase stage of low cost pricing where the firm has gained an exploitable market power in the form of huge customer base and can earn monopoly profits by increasing the price of products to recover the predatory losses. The recoupment expectation of a firm to gain monopoly profits in future by suffering short term losses is supported through greater cash reserves, better financing or cross-subsidization from other markets or other products. (Matsushita Electric Industrial v. Zenith Radio Corp, 475 U.S. 574 (1986)).
To prove the recoupment requirement of a predatory pricing claim, it should be demonstrated that the predatory pricing strategy could eliminate competitors out of the market and there must be evidence that the firm then surged its prices to compensate the predatory losses by obtaining a monopoly power and preventing new entrants to enter the market (MCX Stock Exchange v. National Stock Exchange Of India, Case No. 13/2009 C.C.I). The Hon’ble Supreme Court of United States in the case of Brooke Group Ltd. v. Brown & Williamson Tobacco Corp (509 U.S. 209 (1993)) held that there was a likelihood that the predatory scheme alleged would cause a rise in prices above a competitive level within a disciplined oligopoly that would be sufficient to compensate for the amounts expended on the predation. Predators must obtain enough market power to set prices higher than competitive prices i.e. at supra competitive price levels. The recoupment test shows the efficiency or the success of predatory pricing and also the adverse effect on competition where many competitors are eliminated and exorbitant surge in prices to recover those losses depicts the monopoly power to control prices.
Thus, the above mentioned elements must be present for proving Predatory Pricing. One of the recent cases of Predatory Pricing is discussed in the next section.
BHARTI AIRTEL V. RELIANCE JIO (Bharti Airtel Limited Vs. Reliance Industries Limited & Reliance Jio Infocomm Limited, Case No. 03/ 2017 C.C.I) – CASE ANALYSIS:
One of the recent battles between two telecom giants proves to be a perfect case study for Predatory Pricing. Bharti Airtel Ltd., filed a case against Reliance Jio Infocomm Limited alleging the contravention of provisions of Section 3 and 4 at the Competition Commission of India in 2017. The primary issue relates to the free services being offered by RJIL since its inception of its business from 5th September, 2016. RJIL upon entering the market, announced the Jio Welcome Offer under which data, voice, video and the full bouquet of Jio applications and content was made available to the subscribers absolutely free till 31st December 2016 and subsequently and a new offer of the same nature was provided till 31st March 2017. According to the Informant, it amounted to predatory pricing, in contravention of Section 4(2)(a)(ii). In the process of assessment of alleged contravention the CCI determined the relevant market as the market for ‘provision of wireless telecommunications services to end users in each of the 22 circles in India’. The CCI came to conclusion that RJIL was a new entrant and did not enjoy any dominant position in terms of subscriber base and financial strength in the market. Thus, the alleged abuse does not arise and that no prima facie case of the contravention was made out against RJIL.
After analysing the aforementioned case and other cases under Predatory Pricing, the authors find certain loopholes in Section 4, specifically under predatory pricing.
LOOPHOLES IN SECTION 4(2)(a)(ii):
Section 4 of the Act states that predatory pricing is a form of abuse of dominance. The section provides element which must be fulfilling for the act of predatory pricing to take place. First, it has to be analysed whether the enterprise enjoys dominant position in the relevant market and secondly, whether that enterprise has abused its dominant position. The jurisprudence behind these elements was discussed in the previous sections.
The Act makes it very clear that any charge under section 4 can be attracted only against enterprises with dominant market positions and excludes all other non-dominant enterprises who adopt below-cost pricing strategies which can create an adverse effect on the competition. A new entrant who is not enjoying dominant position may also resort to predatory pricing. It would be immune from this provision by its very character of a new entrant and the defence under explanation to section 4(2)(a) which is “ to meet the competition” would be applicable to them.
At this juncture, it would be appropriate to differentiate between predatory pricing and penetrative pricing on the basis of two major factors:
1) Dominance: An enterprise enjoying a dominant position which adopts below the cost pricing would be termed as Predatory Pricing but an enterprise who is a nascent entrant or new entrant in the market which adopts below cost pricing would be termed as Penetrative Pricing strategy.
2) Intention: The intention of a dominant firm adopting below cost pricing would be to eliminate competitors which makes it Predatory in nature but a new entrant which adopts below cost pricing is to introduce its product(s) or service(s) in the market or to earn subscribers/ customer which makes it Penetrative in nature.
This can be better understood by analysing the difference between the NSE (MCX Stock Exchange v. National Stock Exchange Of India, Case No. 13/2009 C.C.I) and Jio case (Bharti Airtel Limited v. Reliance Industries Limited & Reliance Jio Infocomm Limited, Case No. 03/ 2017 C.C.I). Both companies adopted zero pricing strategy yet Jio was not made liable for predatory pricing or unfair pricing because of the reason of it being a new entrant in the market, while NSE being a dominant enterprise in the market was held liable for unfair pricing. Both the companies’ pricing policies were similar and they had an adverse effect on the competition yet only the dominant enterprise was made liable. Once a new entrant adopts a below-cost pricing strategy, the pricing which is predatory in nature gets camouflaged as pricing which is penetrative in nature and the same does not attract the provisions as it is pro-competitive and not anti-competitive.
This particular loophole has blinded or tied the hands of CCI to charge predatory pricing against companies like Uber and Ola and other e-commerce giants such as Flipkart and Amazon, and Reliance Jio in the telecom sector. These companies have been exonerated from the charge of predatory pricing since they did not enjoy dominant position in their respective markets. As rightly identified by the Raghavan committee, a firm with a small market share can also abuse its market power and create an Adverse effect on the competition yet a dominant firm with significant market share could conduct its business ethically.
Another major anomaly is the presumption that a new entrant will always have an intention to just increase its market share or gain customers while dominant firm’s intention would be to just eliminate competitors. But a new entrant’s pricing strategy though may be to penetrate the market may also adversely affect the competition in the market. The intentions of an enterprise adopting a particular pricing strategy must be analysed by taking circumstantial evidence into consideration and not arrive upon conclusion based on the presumption.
A charge under Section 4 should always be analysed in light of the activity which the firm has resorted and dominance should not be the sole criteria for deciding a case. Sometimes an abuse under section 4 can itself showcase its dominance. In the European Commission’s case of United Brands v. Commission (Case No. 27/76 (1978)), this principle was accepted and was held that the conduct of an alleged dominant firm could be taken into account in deciding whether it is dominant or not. The Commission’s order in the MCX Stock Exchange Ltd v. NSE & Anr. (Case No. 13/2009 C.C.I) has also been relied upon in this regard, wherein it was noted that levying zero transaction fee by NSE and incurring huge losses in the process demonstrated that NSE was in a dominant position. But this position was partially rejected by the Commission in Fast Track Call Cab Pvt. Ltd. & Anr. v. ANI Technologies Pvt. Ltd (Case No. 6 & 74/ 2015). It observed that the conduct of the enterprise can only be used as a complement rather than a substitute for comprehensive analysis of market conditions. The Hon'ble Supreme Court in the recent Uber (India) Systems (P) Ltd. v. CCI ((2019) 8 S.C.C. 697) ordered investigation against Uber for Predatory Pricing. It held that the Section pertinent to Predatory Pricing would be prima facie attracted since this act affects the competitors in Uber's favour or the relevant market itself in its favour. It necessarily means that predatory pricing itself could be a prima facie proof of dominance of an enterprise.
The main reason behind this logical contention is that a predatory loss could only be supported by a sufficient backing up of financial resources or reserves or through cross subsidization which attracts section 19(4) (b) or 19(4)(d). An enterprise can have absolute control over the market forces and can create adverse effect irrespective of it being in a dominant position or not. The legislation should be of such a form that it penalises all types of abuse under Section 4 which has adverse effect on the competition irrespective of an enterprise being dominant or not. If this would have been the position of the legislation then in the Jio case (Case No. 03/ 2017 C.C.I), Jio could have been made liable for predatory pricing as its pricing strategy had affected its competitors in the market negatively.
CONCLUSION:
Predatory Pricing is a complex form of anti-competitive practice. Predatory pricing undertaken by a new entrant because of the greed for market share or by a dominant player in the market would have a great impact upon the competition in the market. Using this pricing strategy by an enterprise not only creates serious implication on the competitors and the consumers but it also affects the economy as a whole. In doing so, enterprises create loopholes in the provision to avoid legal implications for their actions, for which, the competition law must be equipped and it must be transformed to prevent all anti-competitive practices in all forms and by all enterprises. Since India is a developing country and highly competitive in the global arena mainly because of its presence in the export market, any practice which obstructs or hinders competition should be curbed. This can be done only by taking timely cognizance of activities before it eliminates competition and leads to an adverse effect on the market. Thus, a need is created to analyse Predatory Pricing and Penetrative Pricing to its deep roots. Only then, it will be possible to plug all the loopholes in the provision and create a healthy competitive world.